McKonly & Asbury’s April webinar entitled, “Leasing: A New Standard is Finally Here” is hosted by Dan Sturm, Partner; Brett Bauer, Senior Manager; and Tim Showers, Supervisor. During this webinar, attendees will learn how ASC 842 differs from ASC 840; will see illustrative financial statements which highlight exactly what changes as a result of the new standard; and will gain an understanding of what they should be doing now to prepare.

2. Introductions
Dan Sturm
▰ Partner
▰ Areas of focus: Construction, Manufacturing,
Insurance and Employee Benefit Plans
Tim Showers
▰ Supervisor
▰ Areas of focus: Manufacturing,
Construction, and Employee Benefit
Plans
Brett Bauer
▰ Senior Manager
▰ Areas of focus: Manufacturing,
Healthcare, Nonprofit, and
Employee Benefit Plans

3. Course Objectives
1. Participants will learn how ASC 842 differs from ASC 840.
2. Participants will see illustrative financial statements which highlight exactly what
changes as a result of the new standard.
3. Participants will gain an understanding of what they should be doing now to prepare.

4. Why the New Standard?
▰ After nearly 10 years of working on a new leasing standard, the Financial Accounting
Standards Board (FASB) issued ASU 2016-02 on February 25, 2016.
▰ FASB noted over $1 trillion of off-balance sheet leases for SEC registrants.
▰ Too many leases structured in a way to stay off of the balance sheet.

5. What is a Lease?
▰Requires both an identified asset and a right to control the identified asset over a period
of time.
▰Most leases should be straightforward but vendors may revise agreements to keep
liabilities off of the balance sheet.

6. Changes Under the New Standard
▰Many leases will move from disclosure to balance sheet presentation.
▰Lease assets and lease liabilities will be recognized for ALL leases over 12 months.
▻ Current GAAP only requires capital leases to be recognized on the balance sheet.
▰New guidance provides extensive information on lease identification.
▻ Disclosures often don’t receive the same attention as amounts presented on the
face of the financial statements.

7. Changes Under the New Standard, cont.
▰Income statement expense recognition will remain substantially the same.
▻ Retains a distinction between finance (previously capital leases) and operating leases.
▻ Finance leases will recognize interest on the lease liability separate from amortization expense.
Essentially the same as current GAAP.
▻ Operating leases will recognize a single lease cost, so that the cost of the lease is allocated
over the lease term generally on a straight-line basis.
▻ Consider using current GAAP lease criteria (operating v. capital) as a reasonable approach to
determining finance v. operating lease under new standard.

8. Changes Under the New Standard, cont.
▰Segregating lease and non-lease components.
▻ Permitted to elect a policy not to separate lease and non-lease components by asset
class. The result would be additional liabilities.
▻ Examples include maintenance, cleaning and repair services.
▻ Payments of lessor property taxes and insurance are not considered non-lease
components. Amounts considered part of the lease liability.

9. Challenges of New Standard
▰Significant variable lease payments.
▰Accounting for renewal options.
▰Debt covenants.
▻ Liabilities will increase in most cases causing potential debt covenant violations.
▻ May require re-negotiation with lenders of covenants.

10. Polling Question #1
What type of impact do you expect the new leasing standard to have on your
financial statements?
A) Significant impact.
B) Moderate impact.
C) Minimal or no impact.
D) Unsure.

11. Financial Statement Impact
General Observation: The changes resulting from the new leasing standard primarily occur
within the balance sheet and the footnotes.

12. Financial Statement Impact

13. Accounting Transition Considerations
▰Accounting policy elections available to Private Companies:
▻ Option not to reassess the classification of existing leases.
▻ Option to use the “Risk-Free” rate, instead of the incremental borrowing rate, to calculate
lease liabilities.
▰For Private Companies with comparative financial statements, 1/1/2019 is a key date.

14. New Accounting for Operating Leases
Example: Company A has an existing office space lease which qualified as an operating
lease under the previous guidance.

15. New Accounting for Operating Leases
Journal Entry at 1/1/2019 to (1) recognize the Right-of-Use Asset and Lease Liability pertaining to the
new guidance and (2) remove the deferred rent balance that pertained to the previous guidance:

16. New Accounting for Operating Leases
Journal Entry at 12/31/2019 to recognize the lease expense and payments that occurred during
2019:

17. Balance Sheet Presentation
▰Lessees must present the following on the balance sheet or in the footnotes.
▻ Finance lease right-of-use assets and operating right-of-use assets separately from each
other and from other assets.
▻ Finance lease liabilities and operating lease liabilities separately from each other and from
other liabilities.
▰Lease liabilities should be broken out between their current and non-current components.
▰Right-of-use assets will be classified as non-current in virtually all cases.

18. Balance Sheet Illustration
* In this example, right of use
assets under finance leases are
included within ‘property and
equipment, net’ and thus disclosed
individually in the footnotes.
*

19. Balance Sheet Illustration

20. Qualitative Disclosures
▰A general description of the entity’s ongoing lease arrangements.
▰Discussion of any provisions to extend or terminate the leases, including whether the
options are reflected within the lease assets and liabilities recognized on the balance
sheet.
▰Description of any restrictions or covenants imposed by the leases.

21. Qualitative Disclosures
▰Information about significant leases that commenced after the balance sheet date.
▰Significant assumptions and judgments made in determining the lease assets and
liabilities recognized, including:
▻ The determination of whether a contract contains a lease.
▻ The determination of the discount rate used to measure the lease.

22. Qualitative Disclosures Illustration

23. Quantitative Disclosures
▰The following amounts should be disclosed separately for Finance and Operating
Leases.
▻ Lease costs, segregated between those arising from lease asset amortization and those
pertaining to interest on lease liabilities.
▻ Noncash investing/financing activities related to leases.
▻ Cash paid for amounts included in the measurement of lease liabilities.
▻ Weighted-average remaining lease term.
▻ Weighted-average discount rate.

24. Quantitative Disclosures Illustration

25. Quantitative Disclosures
▰Schedule of future finance and operating lease payments that includes:
▻ The undiscounted cash flows on an annual basis for a minimum of each of the next five
years.
▻ The total undiscounted cash flows for all years thereafter.
▻ A reconciliation of the undiscounted cash flows to the lease liabilities recognized on the
balance sheet.

26. Quantitative Disclosures Illustration

27. Disclosures in the Year of Adoption
▰The method of implementation used.
▰A description of the prior-period information that has been retrospectively adjusted, if
any.
▰The cumulative effect of the change on equity as of the beginning of the earliest period
presented.
▰Any practical expedients used in adopting the standard.

28. Transition Disclosure Illustration

29. Polling Question #2
What is your progress toward preparing for the new lease standard?
A) Still trying to understand the new standard.
B) In the process of quantifying the impact.
C) Already adopted the new standard.
D) Hoping to retire before 2020.

30. Step 1: Identify Contracts
▰Know the standard’s definition of a lease.
▰Inventory your leases.
▰Document your population of leases in one centralized location.

31. Step 2: Evaluate Impact
▰Quantify the impact.
▰Educate management and your board on the impact to financial statements and ratios.
▰Talk with your bank.

32. Step 3: Develop Processes
▰Is a transition team necessary for your company?
▰What is your process for capturing all relevant lease information?
▰Who is authorized to enter into contracts?
▰Going forward, should you enter into shorter lease terms?
▰Consider updating your capitalization policy.

34. Polling Question #3
What tools do you anticipate using to account for leases going forward?
A) Modifying our existing software.
B) Purchasing new leasing software.
C) Utilizing Excel.
D) Our leases won’t be in a centralized location.

35. Lease Software
▰Lease software vs. Excel.
▰Is it right for your company?
▰Worth looking into:
▻ Lease Accelerator
▻ Visual Lease
▻ Others

36. How Can We Help?
▰Customized education to your organization.
▻ Talking with your transition team.
▻ Other options – Financial Reporting Framework for Small and Medium-sized Entities.
▰Outsourced accounting solution for your leases.
▻ Inventory, maintenance and tracking of leases.
▻ Reviewing agreements.
▻ Journal entries and accounting.

37. • Create an inventory of existing leases.
• Centralize the population of lease terms.
IDENTIFY
CONTRACTS
• Manage stakeholder expectations.
• Clarify agreement terms with lenders.
EVALUATE IMPACT
• Create efficient and effective lease reporting.
• Evaluate impact on future business decisions.
DEVELOP
PROCESSES
Prepare for Lease Changes

38. Questions?
Dan Sturm
Partner
dsturm@macpas.com
(410) 340-3256
Tim Showers
Supervisor
tshowers@macpas.com
(717) 972-5718
Brett Bauer
Senior Manager
bbauer@macpas.com
(717) 972-5750

39. Thank you for attending!
CPE certificates will be sent to the email address provided at
registration within 2 weeks.
www.macpas.com